Global Economic Crisis

The Conservative/Liberal Coalition now running the government in the United Kingdom began its administration with a flurry of draconian spending cuts. Under the leadership of Prime Minister David Cameron and its chancellor of the exchequer George Osborne, this imposed austerity has been unleashed under the threat of a looming sovereign debt crisis. Social spending is being radically reduced, and the armed forces, especially the Royal Navy, are being virtually disarmed. The question therefore must be posed; will these austerity measures succeed in their stated purpose, which is removing the danger of a sovereign debt catastrophe in the UK?

There are disturbing indications beginning to accumulate that point to the steps being undertaken by Cameron and Osborne as being too late and insufficient. The UK’s Office for National Statistics has just released public spending figures for November, and they show that net public borrowing requirements increased to a record  £22.770 billion. This staggering level of deficit spending seems to show that the UK is now in a public debt trap. Even though unlike the U.S. most of its public debt is long-term, the British government has accumulated a national debt so large that even small increases in bond yields will add significantly to the need for more public borrowing, making it unlikely that even Osborne’s austerity budget will have much impact. Furthermore, these same austerity measures risk a double-dip recession in the UK, further depressing government income. All these trends point to an elevated danger of a sovereign debt implosion confronting the United Kingdom, in a timeframe that may be much sooner than many analysts would anticipate.

A century ago, when  it was said that the sun never set on the British Empire, it was the policy of London politicians that their country’s navy was at least as large as the next two biggest naval powers combined. Those days are long gone. Even during the Cold War, the Royal Navy was in perpetual decline. Whenever a financial crisis arose in Britain, it was the fleet that took the most savage cuts. Now, amid a catastrophic fiscal crisis, the Conservative UK prime minister, David Cameron, has announced an 8 percent cut in defense spending over the next four years. As with previous defense cuts, it is the Royal Navy that stands to be the biggest loser. This time, though, the cuts may actually destroy what is left of the UK’s naval power, leaving in its wake a small coastal protection and fisheries enforcement flotilla, more akin to a glorified Coast Guard.

The key element in the defense cuts is the scrapping of the flagship of the Royal Navy, the aircraft carrier HMS Ark Royal. This will leave only one carrier in Britain’s fleet. However, that carrier will be almost useless, as another key component of the defense cuts is the elimination of all combat jets currently serving in the Royal Navy’s Fleet Air Arm

David Cameron and his minions boast that this is only a temporary suspension in naval capability, as two new aircraft carriers are already under construction. However, under current plans, when these multi-billion dollar carriers are completed, they will become glorified helicopter carriers, as no new naval jets will be available until 2019.

In the last run of naval cuts under the previous Labour government, the Royal Navy lost about half of its destroyers and frigates, and several submarines. There was a grand bargain, however; the money saved from scrapping the escort vessels and submarines would be used to buy the new aircraft carriers and a complement of naval fighter-bombers. However, with no jets available to the Royal Navy until 2019 ( and that commitment is a tenuous one) it would not surprise anyone if the UK government ended up scrapping or selling at least one of the new aircraft carriers, and perhaps mothballing the remaining one indefinitely.

The ruling coalition government claims that even with the defense cuts, the UK will remain one of the most potent military powers in NATO. However, with so much waste at the Ministry of Defense in London remaining, it appears that the bulk of the cuts are directed at real defensive capability.

Ever since the defeat of the of the Spanish Armada in 1588 by Francis Drake, it has been the Royal Navy that has been the most reliable deterrent to aggression in the defense of Britain. It was the fleet that kept Napoleon at bay, and stood between Adolf Hitler and the conquest of the British Isles. Once the totality of Cameron’s naval cuts take effect, however, there will be little left of the Royal Navy save a glorious history.

As expected, George Osborne, Chancellor of the Exchequer in the new British coalition government, unveiled an emergency budget aimed at tacking the UK’s massive structural fiscal deficit. It is being described as the toughest UK budget since the age of austerity that followed in the immediate postwar period after the Second World War. It features a rise in the VAT to 20%, increased income and capital gains taxes, public service wage freezes and across the board programmatic budget cuts. The question that stands is this: will it work?

In my view, as explained in my book (Global Economic Forecast 2010-2015: Recession Into Depression) the United Kingdom, as with many other advanced economies, is in a fiscal and demographic trap. It’s national debt has skyrocketed to almost 70% of GDP; even with the Osborne budget cuts, continuing deficits will send this ratio towards 100% of GDP in the near future. With an aging population, meagre real economic growth at best and an economy that, like a heroin addict, has become dependent on its fiscal deficit fix, the UK economy is in such a trap.

Cut public spending dramatically, warn the critics, and the British economy will enter a double dip recession, and they are right. A renewed economic contraction will diminish tax revenue, largely defeating the purpose  of budget cuts and increased levels of taxation. However, continuing the neo-Keynesian debt folly is even more calamitous, for it will inevitably lead to a total fiscal collapse of the UK.

The real lesson is that the wild spending spree engaged in by policymakers in response to the global economic and financial crisis was flawed, and should have been curtailed before public debt to GDP ratios exploded to unsustainable levels. It is now too late to avoid severe economic pain. The only option left is determining which path will incur the least suffering on society.